Out of the box, lemmy treats all votes as equal whether they're from the local instance or whether they've federated, and all the votes do is change the order of the posts in views that use scores as part of the calculations. (hot, active and top)

This change is simply a change in the weight of downvotes so they have less impact to the score of a post. It won't otherwise change their behaviour.

Also are other instance users currently able to downvote posts on this instance?

Depends what you mean. At the moment, our instance ignores downvotes that federate to us and we ignore downvotes when calculating the score of external posts that do use them. Which is to say, anything you view through this instance is in effect, viewed as if downvotes didn't exist.

However, instances that don't ignore downvotes calculate them in to the post score, which means they will sort posts in a different order.

So if you make a post to an external community that allows downvotes and then get downvoted, people on instances with downvotes will see them, but we won't

You can see more about the ranking formula at https://join-lemmy.org/docs/en/contributors/07-ranking-algo.html